Transcript Slide 1

CHAPTER 6
POLITICAL
ECONOMY
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Political Economy

The field that applies economic
principles to the analysis of political
decision making.
6-2
Political Economy

Social Welfare Function

Unanimity Rules

Majority Voting Rules

Logrolling

Representative Democracy

Dictatorship
6-3
Eve’s share (SE)
Direct Democracy-Unanimity Rules
0’
DrE
Adam’s share (SA)
S*
DrA
0
r per year
r*
The Lindahl Model
6-4
Feasibility of Unanimity Rules

Reaching equilibrium

Practical problems

Strategic behavior

time to reach equilibrium
6-5
Direct Democracy-Majority Voting Rules

Majority Voting Rule


one more than half of the voters must favor
a measure for it to be approved
Paired Voting
6-6
Direct Democracy-Majority Voting Rules
Voter
Choice
Brad
Jen
Angelina
First
A
C
B
Second
B
B
C
Third
C
A
A
6-7
Direct Democracy-Majority Voting Rules



Voting Paradox – community
preferences can be
inconsistent even though
individual’s preferences are
consistent
Agenda Manipulation –
process of organizing order of
votes to ensure a favorable
outcome
Voter
Choice
Brad
Jen
Angelina
First
A
C
B
Second
B
A
C
Third
C
B
A
Cycling – when paired voting
on more than two possibilities
goes on indefinitely without a
conclusion ever being
reached
6-8
Direct Democracy-Majority Voting Rules

How can B win the election?
6-9
Direct Democracy-Majority Voting Rules

How can B win the election?

C Preferred to A

B Preferred to C
6-10
Graphing Preferences
Utility
Single-peaked preferences
Jen
Double-peaked preferences
Brad
Angelina
A
B
C
Missiles
6-11
Practical Importance of Double Peaked
Preferences

Availability of Private Substitutes


Gym
Issues Ranked
6-12
Direct Democracy The Median Voter
Theorem

Median Voter Theorem


As long as all preferences are single peaked and
several other conditions are satisfied, the outcome
of majority voting reflects the preferences of the
median voter
Median Voter

The voter whose preferences lie in the middle of
the set of all voter’s preferences; half the voters
want more of the item selected and half want less.
6-13
Direct Democracy - The Median Voter Theorem
Voter
Expenditure
Donald
$5
Daisy
100
Huey
150
Dewey
160
Louie
700
6-14
Direct Democracy The Median Voter
Theorem

Single Peaked Preferences


Majority Voting = Stable Result
Multipeaked?

Voting Paradox
6-15
Direct Democracy - Logrolling I

Logrolling

The trading of votes to obtain passage of a
package of legislative proposals

PORK!

Measure of Desirability

Up and Down Vote
6-16
Direct Democracy - Logrolling I
Voter
Project
Hospital

Melanie Rhett Scarlet Total Net
Benefits
200
-50
-55
95
Library
-40
150
-30
80
Pool
-120
-60
400
220
Which would be accepted?
6-17
Direct Democracy - Logrolling I
Voter
Project
Hospital

Melanie Rhett Scarlet Total Net
Benefits
200
-50
-55
95
Library
-40
150
-30
80
Pool
-120
-60
400
220
How should Melanie get funding for the
hospital?
6-18
Direct Democracy - Logrolling I
Voter
Project
Hospital

Melanie Rhett Scarlet Total Net
Benefits
200
-50
-55
95
Library
-40
150
-30
80
Pool
-120
-60
400
220
Trade her vote on the library for Rhett’s
hospital.
6-19
Direct Democracy - Logrolling I
Voter
Project
Hospital

Melanie Rhett Scarlet Total Net
Benefits
200
-50
-55
95
Library
-40
150
-30
80
Pool
-120
-60
400
220
Trade her vote on the pool for Scarlet’s
hospital vote.
6-20
Direct Democracy - Logrolling II
Voter
Project
Melanie
Rhett
Scarlet
Hospital
200
-110
-105
Total Net
Benefits
-15
Library
-40
150
-120
-10
Pool
-270
-140
400
-10
6-21
Earmarks

McCain January 2006:

“If we don't stop the earmarking, we're not going
to stop the abuses of power here in Washington.
In 1994, when the Congress was taken over by
Republicans, there were 4,000 earmarks on
appropriations bills. Last year there were 15,000.
It's disgraceful, this process.“

Obama $740 million in 3 Years

McCain at least $24.3 Million in 2006

Definitions
6-22
Direct Democracy - Arrow’s Impossibility Theorem

Arrow’s Impossibility Theorem

(Kenneth Arrow 1951)

All conceivable voting schemes have some potential for
being unfair or producing a paradoxical result
6-23
Direct Democracy - Arrow’s Impossibility Theorem

“Reasonable” Collective Decision-Making Criteria
1.
It can produce a decision whatever the configuration of
voters' preferences
2.
It must be able to rank all possible outcomes
3.
It must be responsive to individuals’ preferences
4.
It must be consistent

5.
Independence of irrelevant alternatives

6.
Transitive
A vs. B excludes A vs. C, etc.
Dictatorship ruled out

Otherwise Satisfication
6-24
Direct Democracy - Arrow’s Impossibility Theorem

Meaning

consistent rule not necessarily impossible to find, but
cannot be guaranteed

Existence of Social Welfare Functions

James Buchanan 1960

Democracy at Work
6-25
Representative Democracy – Elected Politicians

Who makes these decisions?


Politicians!
Median Voter
6-26
Representative Democracy - Elected
Politicians
Number of Voters
Where do you
want to get
your votes?
Liberal
Median
Conservative
6-27
Implications of the Median Voter Model

Stable Two-Party System

Same Outcome

Median Voter
6-28
Other Factors Influencing Voting

Single-dimensional rankings

Ideology

Personality

Leadership

Decision to vote
6-29
Representative Democracy-Public Employees

Function of bureaucrats

Goals of bureaucrats
6-30
Niskanen’s Model of Bureaucracy
C
$
V
Actual
output
Efficient
output
0
Q*
Qbc
Q per year
6-31
Representative Democracy – Special Interests

What are “Special Interests”

Establishment of Special Interest Groups

Source of Income: Capital or Labor

Size of Income

Source of Income: Industry of Employment

Region

Demographic and Personal Characteristics
6-32
Representative Democracy – Rent-Seeking
$
Rents
S=MC
D
tons of peanuts per year
MR
6-33
Representative Democracy – Other Actors

Judiciary

Journalists

Experts
6-34
Explaining Government Growth

Citizen Preferences
G = f(P, I)

Marxist View

Chance Events

Changes in Social Attitudes

Income Redistribution
6-35
Controlling Government Growth

Government growth as a non-issue

Government growth as a problem

Commitments made in the past

Basic flaws in the political system
6-36
Improving the Workings of the Political
System



Change bureaucratic incentives

financial incentives

privatization
Change Fiscal Institutions

Budget Enforcement Act (BEA) – 1990

Balanced budget rules at the state level
Institute Constitutional Limitations

Balanced budget amendment
6-37
Provisions of a Typical Balanced Budget
Amendment
1.
Congress must adopt a budget statement “in which
total outlays are no greater than total receipts”
2.
Total receipts may not increase “by a rate greater
than the rate of increase in national income”
3.
4.
“The Congress and President shall…ensure that
actual outlays do not exceed the outlays set forth in
the budget statement”
The provisions can be overridden in times of war
6-38
Critique of Balanced Budget Amendments

Forecasting issues

Definitional issues

Penalties for violation of the law

Economic issues
6-39